New “duty to defend” decision good news for additional insureds

Justice Carole J. Brown’s decision in Dufferin Construction v The Dominion of Canada, 2015 ONSC 6311 (CanLII) deals with a situation very commonly seen in additional insured/duty to defend cases: the insurer denies coverage to the additional insured, relying on a “arising out of the operations of the named insured” provision, but identical allegations are made against the insured and the additional insured in the underlying claim.

In this construction case, a subcontractor undertook a contractual obligation to obtain liability insurance and to include the general contractor as an additional insured. (Unfortunately the reasons do not specifically set out the terms of the underlying contract in this case.) The subcontractor’s insurer, Dominion of Canada General Insurance Company (now Travelers Canada) issued a certificate that said, “It is agreed that Dufferin Construction Company Limited [the general contractor] is added as an Additional Insured with respect to Commercial General Liability and Umbrella Liability and then only with respect to liability arising out of the operations of the Named Insured at the above-noted project.”

(As I have complained before in these posts, nothing was said in the reasons as to whether an actual additional insured endorsement was issued and if so, what it said. It is the endorsement that creates the coverage.)

In this case, it seems to have been agreed on all hands, that there was additional insured coverage and that it was limited to “liability arising out of the operations of the Named Insured at the above-noted project”.

This is something else that I have commented on in past posts. First of all, does coverage that purports to be limited in this way (“arising out of the operations of the Named Insured”) correspond with the named insured’s contractual obligation? If not, is the named insured in breach of that contract and if so, what are the implications for the insurer and the named insured?

Secondly, the Ontario cases have not delved very deeply into just what “arising out of the operations of the Named Insured” actually means and the extent to which it does limit coverage for the additional insured. Some cases in the United States have held that the resulting coverage is much less narrowly constrained than is often assumed to be the case in Ontario.

Leaving those cavils aside though, the underlying litigation in this case was a suit for personal injuries and both the named and the additional insureds had been sued. Identical and undifferentiated allegations were made against both in that statement of claim. It was also alleged that “the defendants are jointly and severally liable for the plaintiff’s damages”.

The insurer, Dominion, took the position that the claim against the additional insured did not trigger coverage because it did not arise out of the operations of its named insured.

The additional insured brought this application for a declaration that Dominion owed to it a duty to defend.

Justice Brown accepted Dominion’s submission that no extrinsic evidence should be received by her and counsel for the additional insured did not seriously dispute this. Oddly though, Dominion then went on to argue that “there is no evidence to establish that the alleged negligence arises from the operation of [the named insured] and no duty can be said to arise”. Justice Brown adverted to the contradictory nature of Dominion’s position, saying “I note that the same observations with regard to extrinsic evidence would apply to that argument, and evidence would not be permitted in that regard at this point.”

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More costs confusion

I’ve come across a couple of decisions recently that make it even more challenging for an “Elgin Street hack” (to paraphrase John Mortimer) to figure out the law of costs.

My attention was drawn to the first one by Debra Rolph of LawPRO. Having pronounced in a recent post on this blog, the death of the Mantella approach to costs, it now seems that I might have spoken too soon. That post said that in 790668 Ontario Inc. v. D’Andrea Management Inc., 2015 ONCA 557, the Court of Appeal appeared to have disapproved of the Mantella approach to costs, whereby partial indemnity costs could be recovered at an amount up to but not more than the actual hourly rate of the lawyer in question, where that lawyer is charging a discounted rate.

However, Ms. Rolph noted that that same Court of Appeal recently upheld an award of costs by Justice Frederick Myers in Mirkais Investments Inc. v. Klotz, 2015 ONCA 632 (CanLII), affirming 2014 ONSC 6907 (CanLII). In that case, one of the factors that Justice Myers expressly relied upon in making his costs ruling was that in this lawyer’s negligence case, “[the defendant lawyer’s counsel’s] rates are heavily discounted for the defendant’s insurer”. The Court of Appeal said that Justice Myers had “instructed himself properly as to the relevant principles” but did not refer to the discounted hourly rates.

Thus, it remains a bit unclear whether that is or is not a valid factor for a court to weigh and, if so, how it is to be taken into account.

The other case that I saw was not a costs decision as such, but has, I think, some implications for the law of costs. It was a ruling of Justice Frank Newbould in Fairfield Sentry Limited et al v PricewaterhouseCoopers LLP et al., 2015 ONSC 4961 (CanLII) on a motion for security for costs.

It must be said, to begin with, that the amount at stake in that action is very substantial: $5 billion. (The plaintiffs invested with Bernie Madoff and their liquidator is suing their auditors.)

On the motion for security for costs, the plaintiff objected to the hourly rates upon which the defendants had based their demand for security, saying that “these rates are too high and do not reflect the rates recommended in the practice direction of the Costs Subcommittee of the Civil Rules Committee”.

As has been the case in the past, Justice Newbould used fairly strong language in expressing his views about the Costs Subcommittee’s “costs guidance”. However, after his comments have been parsed carefully, it would seem that his only dissatisfaction is that the rates set out in the practice direction are “completely outdated and unrealistic”. (In the quoted passage though, he went on to say, “…for an action fought by two major downtown Toronto law firms”, so it is not clear whether His Honour considers the practice direction to be suitable for more garden-variety litigation (or lawyers!))

He claimed that the Court of Appeal has “now said the same thing” in Inter-Leasing Inc. v. Ontario (Minister of Revenue) 2014 ONCA 683 (CanLII), where Weiler J.A. said:

I agree with the appellant that the cost rates set out in the Information for the Profession set out in the preamble to Rule 57 of the Rules of Civil Procedure are now out of date, and that amounts calculated at 55%-60% of a reasonable actual rate might more appropriately reflect partial indemnity, particularly in the context of two sophisticated litigants well aware of the stakes.

On that basis, Justice Newbould said of the hourly rates being used in the motion for security for costs:

I see no problem in the actual rates being charged in this case by counsel for the defendants. If anything, taking into account the size of this litigation, they are modest. The rate for example for Mr. Ranking, at $750 per hour, is much less than rates charged by many other senior counsel in Toronto in large cases, and calculating partial indemnity costs at 60% of his rate is reasonable. I have no doubt that the rates being charged by counsel for the plaintiffs are at least as high, and probably higher. To order security for costs on the basis of an outdated recommendation made over 15 years ago would not be realistic at all. I accept the rates and the estimate of costs being 60% of those rates.

However, not all of Justice Newbould’s colleagues share his views about the Inter-Leasing case. In a case decided only a few months earlier, Goldsmith v National Bank of Canada, 2015 ONSC 4581 (CanLII), Justice Edward Belobaba was dealing with the same issue, except that he was actually fixing costs in a proposed class action. The defendant in that case (a bank) also argued that the Costs Subcommittee’s practice direction is “out of date” and it submitted “that 60 per cent of a lawyer’s actual rate should be the new partial indemnity measure”.

That argument did not even get out of the starting blocks. Justice Belobaba said:

[T]he defendant’s costs request, based on a “60 per cent of actual” measure, is not tenable. I know that some judges have suggested that the $350 maximum set out in the Grid, indeed the entire Grid, is out of date. For my part, I do not agree. But even if this were so, this should be a matter for the careful review of the Civil Rules Committee rather than ad hoc judicial comment.

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Master MacLeod ruminates about proper practice in cross-examinations

Master Calum MacLeod released a decision recently that has some useful practice tips about cross-examinations on affidavits.

The case is Dumais v Hobbs, 2015 ONSC 5643 (CanLII). Without getting into detail about the facts, there was an action and an application that both arose out of the acquisition of a business. Numerous entities, including a law firm, were involved as litigants.

A motion was brought for the consolidation of the action and the application and evidence was filed in relation to that motion. The parties then undertook cross-examinations on affidavits pertaining to the motion and, a month later, separate cross-examinations on the affidavits that had been filed on the application itself. The motion that Master MacLeod was dealing with here had to do with the applicant’s refusal to answer certain questions on both cross-examinations.

Master MacLeod was very dismayed by what were apparently lengthy and rancorous exchanges among counsel, on the record, in the course of the cross-examinations. (He was too discreet to identify the offenders.) The Master was of the view that there were several misconceptions about the cross-examination process that had led to these exchanges and his reasons sought, in part, to clear those up, both for the lawyers in that case and for the profession generally.

First, he said that there can be differences in the permissible scope of cross-examinations for purposes of motions and applications. Examinations for discovery can be different too. His main point was that the proper scope of the examination is dependent upon context. He referred to the decision of Justice Perell in Ontario v. Rothmans 2011 ONSC 2504 (CanLII); (2011) 5 C.P.C. (7th) 512 (S.C.J.), probably still the leading case on this subject. Master MacLeod was critical of the excessively narrow approach to scope that had been taken in this case, where a witness had refused to answer questions on the first cross-examination (on the consolidation motion), only to then answer the same questions on his cross-examination the following month, in relation to the application itself. Master MacLeod was of the view that the two parts of the litigation (the motion and the application) were not water-tight compartments: the merits of the application itself were relevant to the issues to be decided on the consolidation motion. He felt that the approach that had been followed, apart from being wrong, was also inefficient in that it had resulted in two cross-examinations when one would have sufficed.

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“At least one percent liable”?

Recently, I read Saldana v Caruana et al., 2015 ONSC 4426 (CanLII), a decision of Justice Mario D. Faieta. On a motion for summary judgment, His Honour ruled that a defendant was “at least 1% liable” for a motor vehicle accident. Does this finding bind the trial judge or jury?

The motion had been brought by Intact Insurance which had been sued under its uninsured motorist coverage. The plaintiff was a passenger in a car that was involved in a collision with an unidentified automobile. The driver of the plaintiff’s vehicle was named as a defendant, as was Intact.

Intact moved for summary judgment to dismiss the action against it. (If the identified defendant (the driver of the car in which the plaintiff was a passenger) was held liable to any degree, then Intact’s uninsured motorist coverage would not have to respond.)

In this case, the identified motorist (Caruana) had also moved for summary judgment, seeking a dismissal of the action as against him.

In the result, Justice Faieta granted Intact’s motion and dismissed Caruana’s motion. As mentioned above, His Honour ruled that Caruana was “at least 1% liable” for the collision. The result is that Caruana’s insurer will pay the plaintiff’s entire claim. By virtue of “the one percent rule”, even if, at trial,  Caruana is indeed found only one percent liable.

What struck me as odd about this case is that the trial judge or jury is now limited in the findings that can be made.

What if the judge or jury were to come to a different conclusion? What if, at trial, the trier of fact were of the view that Caruana (or anyone in his position) was not liable at all?

The “one percent rule” comes from s. 1 of the Negligence Act:

Where damages have been caused or contributed to by the fault or neglect of two or more persons, the court shall determine the degree in which each of such persons is at fault or negligent, and, where two or more persons are found at fault or negligent, they are jointly and severally liable to the person suffering loss or damage for such fault or negligence, but as between themselves, in the absence of any contract express or implied, each is liable to make contribution and indemnify each other in the degree in which they are respectively found to be at fault or negligent.

So, “the court” is supposed to determine the degree of fault or negligence. Not several courts. The evidence at trial is bound to be at least somewhat different from the evidence at the motion for summary judgment. It might be considerably different. How can it be that the trial judge or jury can be constrained by findings made by another judge, on different evidence? Not sure…


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C.A. rejects Mantella approach on costs

In a decision rendered today, the Court of Appeal has made it clear that partial indemnity costs should not be awarded in an amount that is equivalent to substantial indemnity. The case is 790668 Ontario Inc. v. D’Andrea Management Inc., 2015 ONCA 557. It also has, I think, some broader implications for the law of costs.

Beginning with Mantella v. Mantella, 2006 CanLII 17337 (ON SC) and culminating in the Divisional Court’s decision in Geographic Resources Integrated Data Solutions Ltd. v. Peterson, 2013 ONSC 1041 (CanLII), a number of cases have held that where counsel has negotiated a retainer with a client whereby he or she is charging a reduced hourly rate, an award of partial indemnity costs can be made that is equivalent to full indemnity, so long as the factors set out in Rule 57.01 are taken into account.

No more. In 790668, the Court of Appeal disapproved of that approach. The motions judge in the case had followed Mantella and Geographic Resources in awarding partial indemnity costs “in the full amount of the actual rates charged by counsel to LawPRO”. Her rationale for doing so was the one that Mantella and succeeding cases had endorsed, that “the LawPRO hourly rates were ‘roughly two thirds of those charged by lawyers practising in this area with comparable experience'” and that she “declined…to apply a ‘double discount'”.

However, the Court of Appeal said that that was an error. Justice Lauwers, writing for himself and Justices MacFarland and Huscroft, said:

In my view, it was an error in principle for the motion judge to award partial indemnity costs in the full amount of the actual costs paid. While a court has discretion to determine the size of the discount to a party’s actual costs when awarding partial indemnity costs, with due consideration of the factors set out in rule 57.01(1) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, I am unable to see, on the facts in this record, a basis to depart from the ordinary rule of thumb that partial indemnity costs should be about one-third less than substantial indemnity costs.

This whole issue is another example of the dichotomy between an approach to costs that tries to be both objective and subjective. I wrote about this problem last December in a post entitled Partial indemnity costs: determined objectively or subjectively?

So, where are we left following today’s decision?

Well, the Court of Appeal says that there is an “ordinary rule of thumb” whereby partial indemnity costs are to be “about one-third less than substantial indemnity costs”. No mention was made in the decision, of the definitions of either term in Rule 1.03, nor of the “Information for the Profession” table created by the Costs Subcommittee of the Civil Rules Committee. That table (now ten years old) sets out maximum partial indemnity hourly rates for lawyers, clerks and students, based largely on year of call.

Is the “Information for the Profession” table now of no effect? Given that the Court of Appeal, in today’s decision, said that “[t]he applicability of Mantella and Geographic Resources is an issue of general importance”, it is unfortunate that more clarification was not provided.

In 790668 itself, Justice Lauwers applied “a discount of one third against the actual hourly rate charged to [sic] the third parties’ counsel in fixing partial indemnity costs”. Based on his earlier comments about “the ordinary rule of thumb (quoted above), this would suggest that he was treating “substantial indemnity” costs as equivalent to actual fees charged. But that is not what the Rules say. In fairness though, when we look at what they do say, the picture does not become a lot clearer.

Rule 1.03 defines both “partial indemnity costs” and “substantial indemnity costs”. The definition of the former is: “costs awarded in accordance with Part I of Tariff A”.

“Substantial indemnity costs” are defined as “costs awarded in an amount that is 1.5 times what would otherwise be awarded in accordance with Part I of Tariff A”.

Part I of Tariff A then directs us to the Courts of Justice Act and Rule 57.01:

The fee for any step in a proceeding authorized by the Rules of Civil Procedure and the counsel fee for motions, applications, trials, references and appeals shall be determined in accordance with subsection 131 of the Courts of Justice Act and the factors set out in subrule 57.01(1).

Section 131 of the Courts of Justice Act says little more than that costs are in the discretion of the court:

Subject to the provisions of an Act or rules of court, the costs of and incidental to a proceeding or a step in a proceeding are in the discretion of the court, and the court may determine by whom and to what extent the costs shall be paid.

Subrule 57.01 sets out the factors that courts are to consider in awarding costs:

57.01 (1) In exercising its discretion under section 131 of the Courts of Justice Act to award costs, the court may consider, in addition to the result in the proceeding and any offer to settle or to contribute made in writing,
(0.a) the principle of indemnity, including, where applicable, the experience of the lawyer for the party entitled to the costs as well as the rates charged and the hours spent by that lawyer;
(0.b) the amount of costs that an unsuccessful party could reasonably expect to pay in relation to the step in the proceeding  or which costs are being fixed;
(a) the amount claimed and the amount recovered in the proceeding;
(b) the apportionment of liability;
(c) the complexity of the proceeding;
(d) the importance of the issues;
(e) the conduct of any party that tended to shorten or to lengthen unnecessarily the duration of the proceeding;
(f) whether any step in the proceeding was,
(i) improper, vexatious or unnecessary, or
(ii) taken through negligence, mistake or excessive caution;
(g) a party’s denial of or refusal to admit anything that should have been admitted;
(h) whether it is appropriate to award any costs or more than one set of costs where a party,
(i) commenced separate proceedings for claims that should have been made in one proceeding, or
(ii) in defending a proceeding separated unnecessarily from another party in the same interest or defended by a different lawyer; and
(i) any other matter relevant to the question of costs.

This isn’t very helpful.

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Covenant to insure bars misrepresentation suit by commercial tenant

D.L.G. & Associates Ltd. v. Minto Properties Inc., 2014 ONSC 7287 (CanLII), a decision of Justice Paul Perell, raises some questions as to how far-reaching are the effects of a covenant to insure between landlord and tenant. Justice Perell considered whether a covenant to insure by a commercial tenant precluded a damages claim by that tenant, based upon misrepresentations said to have been made by the landlord, that induced the tenant to enter into the lease.

On a Rule 21 motion, Justice Perell gave effect to the covenant to insure and dismissed most of the tenant’s claims. The tenant was permitted to proceed with a claim for fraudulent misrepresentation as that was held by Justice Perell not to be affected by the covenant to insure.

There are a couple of things that are interesting about this decision. First, it was not a claim by the tenant for the actual cost of repairing the damage occasioned by the event for which it was supposed to be insured (or at least, not only that type of claim) that was found by Perell J. to have been barred by the covenant to insure. Rather, it was a more general claim which had alleged that the lease itself (in which the covenant was contained) was not valid because of misrepresentation by the landlord.

Secondly, the tenant’s insurer revoked its coverage after the first of two sewer backups. The landlord accepted this revocation and agreed that the tenancy could continue with the reduced coverage. Yet, after the second sewer backup, by which time coverage for that risk had ended, the landlord was still allowed to rely on the covenant to insure to defeat the tenant’s claim.

It seems to me that both of these findings are problematic.

I can’t do a better job than Justice Perell did in summarizing the facts succinctly:

[2]               DLG, which operated a franchised restaurant, is a former commercial tenant of Minto. In this action, DLG alleges that it was induced to enter into its lease because of Minto’s fraudulent misrepresentations about the state of the plumbing in Minto’s mixed residential and commercial complex.

[3]               In essence, DLG says that Minto lied that there had been no problems about sewer back-ups affecting the leased premises in the complex and then it lied again about taking steps to remediate the problems. DLG alleges that it was induced to enter into the lease and then Minto recklessly breached its obligation to correct the known plumbing problems and that as a result, there were two sewer back-ups that put DLG out of business. DLG sues Minto and advances claims of breach of contract, negligence, negligent misrepresentation, and fraudulent misrepresentation.

Minto moved to have DLG’s claim struck out and the action dismissed. While it advanced several arguments, the one that I am focusing on in this post was the principal one: that DLG’s claims were barred by the covenant to insure, contained in the lease with Minto.

That covenant, contained in paragraph 7.1(a) of the lease, was quite comprehensive. Among several types of insurance that DLG was required to obtain was “‘All Risks’ (including fire, extended coverage, flood, sewer backup and earthquake) property insurance”.

In its action against Minto, DLG alleged that Minto had misled it about prior instances of plumbing failures and sewer backups when the lease was being negotiated and that those misrepresentations by Minto had induced DLG to enter into the lease, which it otherwise would not have done.

On October 6, 2011, about three months after DLG had taken possession, the sewer backed up. The plumbing system in the premises turned out not to have met the Building Code standards.

Minto paid for the cost of the clean-up and reconstruction (although in the litigation, it characterized this as a “gratuitous” payment).

Significantly (to my mind, at least), Justice Perell said this:

After the sewer back-up, DLG’s insurer revoked coverage for flood and sewer back-up damages. Minto acknowledged the cancellation and accepted the continuation of DLG’s lease  with the correspondingly reduced coverage. [Emphasis added]

After the October, 2011 sewer backup, Minto had received advice to install a backflow preventor in the plumbing system. Justice Perell said that “Minto promised to implement these recommendations, and DLG relied on the promise. Minto, however, did not implement the recommendations, and on September 6, 2012, there was a second sewer back-up.”

Following this second sewer backup (which again required DLG to close for an extended period), DLG’s franchisor terminated its franchise. Shortly afterwards, DLG notified Minto that it (DLG) was treating the lease as terminated and relied on what it claimed were Minto’s fundamental breach and repudiation of the lease agreement.

Minto rejected DLG’s position and itself terminated the lease for non-payment of rent.

So far as I can see, from the passages in the statement of claim that were quoted in the judgment, the ensuing lawsuit by DLG alleged that Minto had induced DLG to enter into the lease by misrepresenting the plumbing history of the premises. DLG was looking to have the lease set aside and it claimed damages of various sorts. The reasons do not specifically say whether there was any claim for the losses that DLG experienced as a direct result of the first or the second sewer backups. To me, the presence or absence of such a claim or claims would be an important fact.

Justice Perell concluded that DLG’s claims for breach of contract, negligence, and negligent misrepresentation were precluded by the covenant to insure. He allowed the claim for fraudulent misrepresentation to continue. It is his analysis of the effect of a covenant to insure on which I wish to focus.

His Honour  began his analysis by looking at the three Supreme Court of Canada cases that are undoubtedly the cornerstones of the law in this area: Cummer-Yonge Investments Ltd. v. Agnew-Surpass Shoe Stores Ltd., 1975 CanLII 26 (SCC), [1975] 55 D.L.R. (3d) 676 (S.C.C.); (2) Pyrotech Products Ltd. v. Ross Southward Tire Ltd., 1975 CanLII 25 (SCC), [1975] 57 D.L.R. (3d) 248 (S.C.C.); and (3) Smith v. T. Eaton Co., 1977 CanLII 39 (SCC), [1977] 92 D.L.R. (3d) 425 (S.C.C.).

His Honour said that “[t]he effect of these cases is that if a contracting party covenants to obtain insurance, then that party must look to the insurance and he or she may not sue the other contracting party for damages for the insured risk or for the risk that ought to have been insured.” I agree with that characterization of these decisions.

Justice Perell also looked at more contemporary authorities, such as Madison Developments Ltd. v. Plan Electric Co. (1997), 1997 CanLII 1277 (ON CA), 36 O.R. (3d) 80 (C.A.) and others, but they merely reinforced the principles laid down by the Supreme Court trilogy.

His Honour then applied that law to this case:

Applying the above authorities to the assumed to be true facts of the case at bar, I conclude that it is plain and obvious that DLG’s claims for breach of contract, negligence, and negligent misrepresentation cannot succeed and are barred by the covenant to insure.

This is the first of the two points with which I have some difficulty. The cases say that a covenant to insure amounts to “an assumption by that party [the one giving the covenant] of the risk of loss or damage caused by the peril to be insured against” [emphasis added]. (Quoted from Sanofi Pasteur Ltd. v. UPS SCS Inc., 2014 ONSC 2695 (CanLII))

How can it be said that by entering into covenant to insure, DLG assumed the risk that it had been induced to enter the lease by Minto’s negligent misinterpretation? That was not the “peril to be insured against”.

I can certainly see how a claim for damages consequent upon the October, 2011 sewer backup would have been foreclosed by the covenant to insure (leaving aside the more fundamental question of whether the lease was valid in the first place). DLG agreed to obtain insurance against losses resulting from the peril of sewer backup so when just such a loss materialized, that is a risk that it could legitimately be said to have assumed. That is exactly how covenants to insure are supposed to operate: they transfer to the party giving the covenant the risk occasioned by the peril to be insured against.

But it seems to me that it is a much more sweeping conclusion to say that the covenant to insure prevents DLG from even challenging the validity of the lease. I don’t see how one relates to the other. What insurance coverage could DLG have looked to for redress in relation to its central claim: that Minto’s misrepresentation invalidated the lease?

Then, there is the other question: the effect of the covenant to insure on the second sewer backup, by which time DLG had lost its insurance against that risk. Before Perell J., DLG argued that Minto could not rely on the covenant to insure in relation to the second sewer backup. It relied on principles of “acquiescence, waiver, and equitable or promissory estoppel”. However, Justice Perell rejected those arguments, saying that “I, however, do not see how these equitable principles can be found to apply based on the pleaded facts.”

(To me, the situation is simpler. If Minto agreed to continue the lease after DLG’s insurance coverage was reduced, why would this not have amounted to a variation of the terms of the lease agreement itself, agreed to by both parties? Viewed in this way, there would be no need to engage equitable principles. The issue would be a straight matter of contractual interpretation: there was no longer a covenant to insure against the risk of loss resulting from the peril of sewer backup by the time of the second loss.)

I do agree with Justice Perell, that the change in DLG’s insurance after the first loss would not have affected its position in relation to that loss, when the covenant to insure and the sewer backup insurance were still in place. But, as outlined above, I do not see how even at that point, the covenant to insure could possibly have defeated a claim for damages based on DLG having been induced to enter into the lease by Minto’s negligent misrepresentation.

Justice Perell also considered an argument by DLG, that the covenant to insure was an exculpatory provision rendered unenforceable by the Supreme Court’s decision in Tercon Contractors Ltd. v. British Columbia (Minister of Transportation and Highways), [2012] 1 S.C.R. 69. He rejected this argument but I have not summarized it here, as it was principally the “covenant to insure” issue that I was interested in.

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More costs uncertainty

A recent post commented on the dichotomy in the approaches followed by Ontario courts in fixing costs. Some use an objective approach (in which the Rules Committee’s “Information for the Profession” is the starting point and the actual hourly rate has little or no relevance) while others use a subjective approach (usually starting with 60% of the actual hourly rate charged to the client). Typically, the “Information for the Profession” table is not referred to at all in the second approach.

Justice Douglas Belch’s December 22 costs ruling in 2145850 Ontario Limited v. Student Transportation, 2014 ONSC 7401 (CanLII) is a recent example of the “subjective” theory, in which actual hourly rates are of primary importance. Justice Belch set out his approach as follows:

From the costs submissions, the court has compiled information about the counsel involved including the year of their call to the bar, the number of hours each expended, their hourly rates and in the case of the Plaintiffs and STEO [the defendant], determined their hourly rates for partial indemnity equate to 60% of their actual rates consistent with past court decisions.

The plaintiffs’ lawyers were called to the bar in 1992, 2006 and 2011 respectively. The partial indemnity rates used were $495, $325 and $245. The first of these is higher than the highest rate, for the most senior of lawyers ($350), set out in the “Information for the Profession”. The rate of $495 is 60% of an actual rate of $825.

By contrast, the defendant’s lawyers were called in 1977, 2006 and 2009 and all had a partial indemnity hourly rate of $252. So, in this case, we have two lawyers with the same year of call (2006) using rates that varied by $73. And the senior lawyer for the plaintiff, who was 15 years junior to the senior lawyer for the plaintiffs, had a partial indemnity rate almost twice as high (and well in excess of the maximum in the “Information for the Profession”).

The total of the fees of the plaintiffs’ lawyers was $159,761 (there appears to have been an arithmetical error of about $5,000 in computing the fees of the junior lawyer for the plaintiffs, whose fees are shown as $58,809 but actually work out to $53,802). Still, had the maximum fees from the “Information for the Profession” been applied, the total would have been $123,339, $36,422 less than the total of the fees as computed based on actual hourly rates.

Justice Belch reduced the plaintiffs’ costs from the amount claimed but of course, the reduction was from a figure that was quite a bit higher than it would have been, had the “Information For the Profession” maximums been used.

In addition to the subjective-objective problem, this litigation was taking place in Perth. I doubt that any lawyers are charging $825 per hour there. While some courts have refused to allow Toronto hourly rates in centres where the standard rates are much lower (see, for example, my recent post about the decision of Justice Quinn in Huber v. Way), this issue does not appear to been argued before Justice Belch.

The Superior Court (or the Rules Committee) needs to figure this out. The approach used by Justice Belch in this case is completely at odds with that used recently by Justice Price in TMS Lighting Ltd. v. KJS Transport Inc., where actual hourly rates were said to be “irrelevant”.  But that is not to say that either judge is an outlier; both approaches have their adherents.

A more standardized approach to fixing costs would be desirable. It is clear that judges often decide costs without realizing that some of their colleagues are applying completely different principles, resulting in unpredictable and inconsistent outcomes.

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Duty to indemnify sometimes broader than duty to defend?

Mr. Justice Timothy D. Ray just released a decision that is something of an anomaly: he ruled that a liability insurer did not owe a duty to defend two individuals who had been sued for defamation. But he acknowledged that it might turn out at trial, that the two are covered after all and might therefore recover their defence costs. How can that be, given that there need only be a “possibility” of coverage to trigger a duty to defend?

The case is Virani v. Intact Insurance Company, 2014 ONSC 7369 (CanLII). Two individuals were sued by the Canadian Federation of Students for having defamed it in a video published on the Internet.

The defendants sought coverage from Intact Insurance, which is the insurer of the Canadian Alliance of Student Associations (“CASA”). They claimed to be employees of that Association. Intact’s policy provided coverage to “’employees’, other than the Named Insured’s ‘executive officers’ only while performing duties related to the conduct of the Named Insured’s business”.

Intact denied coverage and the defendants both brought applications in which they asked the court to declare that they were owed defences by the insurer. It was those applications that Justice Ray decided.

The defendants (applicants before Justice Ray) sought to introduce evidence that they were entitled to coverage and defence, as being employees of CASA and having performed duties related to the conduct of the latter’s business when they made the video that was the subject of the suit.

Intact evidently agreed (para. 11 of the reasons) that “there was an employment relationship between CASA…and the applicants”. However, the statement of claim in the underlying action did not allege that and neither did it allege that the applicants had been performing duties in the conduct of CASA’s business when making the video. So, the requirement that they have been “performing duties related to the conduct of the Named Insured’s business” was the barrier to coverage.

The applicants were left to argue that “it is a reasonable inference that the video was made while they were in the course of their employment. The argument is that the claim against the applicants is so vague and general that the inference is not foreclosed.”

Justice Ray reviewed the well-established jurisprudence and acknowledged that “[t]he duty to defend test being a ‘mere possibility’ has been held to be broader than the duty to indemnify”.

His Honour was not prepared to consider all of the extrinsic evidence that was urged upon him by the applicants. Based upon his review of the statement of claim, he concluded:

[T]he substance of the claim is clear; and in no way implicates the applicants as employees of CASA making a video in the course of their employment. The extrinsic evidence is of no assistance and should not be considered. I cannot expand the ‘mere possibility’ to include that the videos were made in the course of their employment. There is simply nothing on which that inference can be based.

So far, so good. But what is odd is the next paragraph in the reasons

While I have a good deal of sympathy with the applicants’ dilemma in defending a lawsuit of this kind, I am satisfied that, if as suggested, the applicants are found not liable, or alternatively found to have made the video in the course of their employment, that they will have recourse to recover their costs, including the costs of this motion.

This would appear to recognize that indeed, there is a possibility that the applicants will be found, at trial, to have made the video in the course of their employment. And if such a finding were to be made, they would, it appears, be entitled to coverage from Intact, which would include being reimbursed for their defence costs. That would mean, in this case, that the duty to defend will have ended up being narrower than the duty to indemnify.

It strikes me that if the applicants’ liability in the underlying action depended upon them being employees of CASA and acting in the course of that employment, the absence of any allegation to that effect in the statement of claim would have been fatal to coverage. But it appears that Intact’s definition of “insured” did not require that the liability arise from the employment with CASA, only that, as a matter of fact, the applicants be employees and be “performing duties related to the conduct of [CASA’s] business”. Was that finding not one that was still “possible” at this stage?

If that is not the right approach, then I am not sure how best to resolve this problem. Leaving the issue to trial seems to run counter to the rationale underlying the “mere possibility” approach of Nichols v. American Home Assurance Co. (1990), 68 D.L.R. (4th) 321, [1990] 1 S.C.R. 801 and the cases that have followed it.

Marcus Snowden and Mark Lichty, in their Annotated Commercial Liability Policy, observe (§12.20.3(2)), that “the application of the ‘mere possibility’ principle necessarily depends on the nature of the coverage issues raised and the evidence submitted”. They mention the decision of Justice Heidi Polowin in Spezzano v. Spezzano, 2002 CanLII 49488 (ON SC), where the court heard evidence in a coverage dispute in order to determine the issue of whether or not, at the time of the motor vehicle accident, the driver’s licence had expired. Justice Polowin made an “interim order” of relief from forfeiture and ordered the insurer to defend. Snowden and Lichty, commenting on that decision, observed that “the judgment is noticeably lacking in ‘mere possibility’ language, and this is hardly surprising, given that determinations were made on questions of fact after hearing extensive evidence”. Still, they appear to acknowledge that, in an appropriate coverage dispute (and they cite the Court of Appeal’s ruling in Longo v. Maciorowski, 2000 CanLII 16897 (ON CA) as having opened the door in at least certain types of cases, being those involving allegations of breach of condition), a departure from the conventional “mere possibility” analysis might be called for, involving some sort of evidentiary hearing.

It would certainly have been a departure from the jurisprudence to have such a hearing place in this case, where no breach of condition was alleged. Still, with that sort of extrinsic evidence, the court would have been in a much better position to decide the case.

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Two-tier test for conflicts?

Justice Ian Nordheimer, sitting as a single judge of the Divisional Court, recently granted leave to appeal from a decision of Justice Alfred J. O’Marra. The latter had declared that the boutique law firm Lloyd Burns McInnis LLP (“LBM”) could continue as counsel for a group of insurers despite the fact that a lawyer who had acted for the opposing party had joined LBM.

The case is H.M.Q. v. Chartis Insurance, 2014 ONSC 6792 (CanLII). The action is between Her Majesty the Queen (as plaintiff) and two insurance companies. (A number of other insurers are third parties.)

A particular lawyer, Michael Foulds, was practising with the firm Theall Group LLP, which represented Her Majesty. He was heavily involved in the file.

According to the reasons of Nordheimer J., at “the urging of” Douglas McInnis of LBM,  Mr. Foulds left the Theall Group and joined LBM. It is apparently intended that he will work closely with Mr. McInnis (although not, obviously, on this file).

LBM proposed that an ethical screen be erected to address the conflict of interest that would result from Mr. Foulds’ move. However, the plaintiff did not consider that any ethical screen could adequately deal with the situation and asked that McInnis withdraw as lawyers for the defence. The firm refused and applied for a declaration that it was entitled to continue.

Justice O’Marra stressed the right of a litigant to counsel of his or her choice and noted that Mr. McInnis had expended 400 hours on this case already. He was satisfied that the measures proposed by LBM would adequately address the conflict situation and that the plaintiff would be prejudiced by having to retain new counsel.

HMQ sought leave to appeal the decision. Justice Nordheimer thought that his colleague might have reversed the onus dictated by the Supreme Court’s decision in MacDonald Estates v. Martin, 1990 CanLII 32 (CSC), [1990] 3 S.C.R. 1235. Justice Nordheimer said that “it is not clear to me that the motion judge approached this matter from the perspective that there was a presumption that LBM should be disqualified, unless LBM could rebut that presumption. Instead, the motion judge appears to have treated the matter as a balancing act between the moving party’s concern over the imparting of its confidential information to opposing counsel and the responding parties’ right to counsel of their choice”.

Justice Nordheimer concluded that there was good reason to doubt the correctness of Justice O’Marra’s decision and granted leave to appeal. However, I was struck by one comment that he made, in which he appeared to be of the view that the presumption of conflict would be less easily discharged by a boutique law firm than by a larger firm:

LBM is a fourteen member boutique firm. This is not a law firm of hundreds of lawyers operating out of multiple offices. The potential for inadvertent disclosure of confidential information is therefore heightened in this case. When one adds to that reality the fact that it was, and is, intended that Mr. Foulds will work closely with Mr. McInnis on other matters, including on matters for the responding parties, the potential for inadvertent disclosure of confidential information increases even more.

This is an interesting issue. Might it be the case that, no matter how airtight the conflict screen, LBM or firms like them will simply be incapable of rebutting the presumption of conflict due to their size? If so, what is the threshold size of firm at which this would start to become a concern? And what evidence, if any, could be marshalled to address the issues arising from a firm’s small size? Would the lawyer in question have to give evidence about his or her personal relationship with the lawyer in the firm still working on the file? About their other files together?

And would someone from a large firm be expected to provide the same sort of evidence, or would the simple fact of the firm’s large size be sufficient?

The appeal decision should be interesting.

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Lawyers’ affidavits: beware!

Another decision of Justice Frederick L. Myers. I can’t help it, he’s very quotable.

In Ferreira v. Cardenas, 2014 ONSC 7119 (CanLII), he was dealing with a motion for summary judgment on the liability issue in an action arising out of a motor vehicle case.

(I would say, parenthetically, that I have noticed a significant increase in the number of MVA cases in which courts are being asked to decide the liability issue, or part of the liability issue, on a motion for summary judgment. And for the most part, the decisions are being made.)

In this case, one defendant was seeking the dismissal of the contribution crossclaim being made by another defendant. The only evidence filed on behalf of the defendant who was responding to the motion was an affidavit of his lawyer. The affidavit reviewed various aspects of “the file” (the police report, the discovery evidence of the plaintiff) and the lawyer concluded, in her affidavit, that “there are genuine issues requiring a trial”.

Justice Myers was not impressed. He commented that “Lawyer’s affidavits that recite background gleaned from ‘the file’ are especially problematic”, a point that was made some time ago by Justice Theodore Matlow in some cases that I discussed in this column. (In his rulings, Justice Matlow had refused to admit certain affidavits but in one of them, he was reversed by the Divisional Court. However, it looks like the propriety of affidavits based on a review of “the file” are being called into question again.)

Justice Myers cited with approval a decision of Master Calum MacLeod, who laid down some guidelines about lawyers’ affidavits: Mapletoft v. Christopher J. Service2008 CanLII 6935 (ON SC). Those guidelines probably bear repeating, since Justice Myers ignored the affidavit of the lawyer in this case and proceeded to give judgment against her client:

15.  For the guidance of counsel in future, I propose the following guidelines:

a)      A partner or associate lawyer or a member of the clerical staff may swear an affidavit identifying productions, answers to undertakings or answers given on discovery. These are simple matters of record, part of the discovery and admissible on a motion pursuant to Rule 39.04. Strictly speaking an affidavit may not be necessary but it may be convenient for the purpose of organizing and identifying the key portions of the evidence. Used in this way, the affidavit would be non-contentious.

b)      If it is necessary to rely on the information or belief of counsel with carriage of the file, it is preferable for counsel to swear the affidavit and have other counsel argue the motion.  This approach will not be appropriate for highly contentious issues that may form part of the evidence at trial.  If the evidence of counsel becomes necessary for trial on a contentious issue, it may be necessary for the client to retain another law firm.

c)      Unless the evidence of a lawyer is being tendered as expert testimony on the motion, it is not appropriate for an affidavit to contain legal opinions or argument.  Those should be reserved for the factum.

In the post-Hryniak world, in which we will be seeing more motions for summary judgment, affidavit protocol is likely to acquire greater importance. Following the Mapletoft principles and avoiding affidavits that are based upon a “review of the file” are probably a good place to begin.

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